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Vegas lounge-like parodies about doomsday economics? Versusplus has delivered that dreamy combo with cheesy renditions of pop culture’s own mild-mannered musical scores transposed with failing economic verses. On the menu be sure to note everything from Alan Greenspan’s floundering prophecies to the economy “herself,” where she is slated to rise again in the near future. So get your bank account – or mattress, if that’s where you’ve been keeping your cash – ready to reap the financial rewards once again…just be sure to hold onto some this time around.

If you would like to entertain a complex mental state of “ignorance is bliss” while still acknowledging the downfall of your wallet, watch the compilation of bitter notes linked on The Bull Market Party’s Over-ture.

Jennifer Cipollini

Prior to the advent of online brokers and the software and technology that this revolution spawned, most traders were limited to only a few types of orders, such as market and limit orders. Contingent orders such as the one cancels other orders, can be a great tool for swing traders. TradeKing offers this facility in their online trading platform along with other brokers. For more information on this feature at TradeKing along with some ways of using it, click here.

While not all brokers offer this feature, it is a great way to manage risk for an end-of-day swing trader. For example, I am not able to, nor do I want to by a trader who has to sit in front of computer all day. The ability to use OCO orders, allows me to better manage my risk on swing trades.

My methodology is as follows:

I have a number of scans which I run after the market close to develop some swing trading ideas. Utilizing my criteria, I review the scans and determine which stocks I want to trade.

The next step is to determine my entry and exit points. One of my exit points will be my stop loss, the other will be my targeted profit. This is where the OCO, or one cancels other order comes in handy. Once I am in the trade, I can put in an order for the stop loss and another order for a profit target. This way I lock in a potential profit while protecting my capital.

Lets look at an example:

Here is a stock that came up in a scan. If I decided to trade this stock, I could set an initial target at the previous high of $33.66, and a stop loss just below the last pivot low at about $30.00. Suppose, I place an order to buy 200 shares of the stock in the morning and set an alert to let me know when I am filled. Now, suppose my I do get filled at $31.53 (today’s close in this example). I would then set a stop loss order at $30.00 for a risk of $1.53. My target for half my position is the previous high or $33.66, for a possible profit of $2.13. I could then place a limit order to sell at this price. Now, if the stock rises to this value, I will be sold out of half my position and the stop loss order will be cancelled. I can sleep better knowing what my risk is as well as knowing I have some profit however small. Also, I can keep moving up the stop loss as the stock rises, reducing my risk each time.

The purpose of this example is not to recommend this particular stock but to illustrate a way to use the OCO order to manage risk.

If your broker does not have this capability, you may want to find one that does. This type of order gives you the flexibility to swing trade on an end-of-day basis, by giving you the ability to better manage your risk.

Shalini Gupta

We often speak about volatility, strike prices, interest rates and days to expiration or time value when it comes to option prices, but we rarely talk about the distinct impact that dividends have on option prices. One really good discussion about this relationship can be found at TradeKing.

The primary impact to understand is that cash dividends affect option prices through their effect on the underlying stock price. The reason is because the stock price typically declines by the amount of the dividend on the ex-dividend-date. Keep in mind high cash dividends suggest lower call premiums and higher put premiums.

In addition, option prices anticipate dividends that will be paid in weeks and even months before they are announced. Another thing that usually happens with dividends and options is that owners of call options that are in-the-money often times exercise early to capture the cash dividend.

Also, early exercise only makes sense for a call option if the stock is expected to pay a dividend prior to expiration date. Though not as impactful as some of the other variables that go into option pricing it is still prudent for the active option trader to be aware of dividends as well as their respective ex-dividend-dates.

Jeff Neal

Investigative author Michael Lewis penned an analysis in hindsight: the unhinging of a Wall Street built on false powers, abilities and intelligence. Lewis extrapolates from his own experiences with Salomon Brothers, unearthing the paper-made money trail to the most astounding economic scandal in the financial kingdom’s history- subprime mortgage bonds and the industry that bought it, sold it and bought it again.

Dawning in the mid 1980’s, growth of monetary power and influence in Wall Street giants such as Lehman Brothers and Bear Stearns found such clout with ratings powerhouses, insurers (e.g. AIG) and investors that the greed train could not be stopped. Exchanges of “interest only negative amortizing adjustable rate subprime mortgages” from predatory lenders were re-packaged (laundering of low credit bonds) repeatedly into mortgage bond machines until an AAA rating of BBB subprime pools could be realized. Ratings powerhouses, predominately S&P and Moody’s, saw their credibility threateningly shaken as mindless actions caused them to be revealed as mere pawns by Lewis, only present to place a bought stamp of approval – effectively sheathing the wolf in sheep’s clothing.

Tragic as it was, by the early years of the new millennium, Dr. Mike Burry (vigilante investor) was shouting “the emperor has no clothes,” and as in the fairytale, at the onset no one was listening. As time would prove to him and few others, betting against the system was the only sure bet to make. Lewis weaves a theatrical dark tale of how the one-eyed Asperger’s doctor heading Scion Capitol, Mike Burry, Cornwall Capitols misfits and disgruntled financial guru Steve Eisman bet against the house and won, won and won – more than Wall Street would have ever predicted. And that is exactly how they did it. By the time most of Wall Street’s players found their theatrical scripts to be that of the lackeys, it was too late.

Michael Lewis exposes the idiosyncratic policies of gambling on Wall Street in an unregulated subprime bond market. Discovery of the appropriate side of the fence to be on proves to be a vastly important strategic maneuver for the investor. Bet with the “house” or against? And where exactly does the “house” stand?

So how does an investor learn this information? Well, if anything can be gleaned from the crazy side bets of Dr. Mike Burry and the like, read, ask and listen to everything. I’d personally recommend starting here, with The Big Short. Whether investing in stocks or bonds, the advice remains the same: be smart about it or decide to let others use your money at their own discretion, amassing their own fortune.

Michael Lewis is also the author of The Blind Side, Liar’s Poker, Moneyball and Home Game.

Jennifer Cipollini

The VIX, commonly referred to as the “fear index,” is closely watched by option traders and provide mixed messages. For a great discussion on what the VIX is conveying check out these discussions at TradeKing.

The VIX is calculated by averaging S&P 100 Stock Index at-the-money put and call implied volatilities. The availability of the index enables investors to make more informed investment decisions. Going over the VIX history along with the S&P 100 OEX index it is quite evident that all of the spikes in volatility accompanied market downturns and significant events that affected the market.

This history reveals a great deal about the relationship between market and volatility. There is a definite tendency of the VIX to spike upward during periods of market decline. For example, during the major market decline of October 1987 volatility reached very high levels. Volatility then declined steadily until late 1989. The spike in volatility at that time was the result of the sharp one-day market correction in October.

Another sharp increase in volatility occurred in August and September 1990, the period during which Iraq invaded Kuwait. In January 1991, volatility rose sharply again, just before the initiative led by the United States known as Operation Desert Storm. The last peak in volatility displayed in the chart reflected the downturn in the market, occurring one month before the United States presidential election in November 1992.

The tendency of market volatility to expand during market downturns is clear from this historical account. This relationship is the subject of numerous studies of the options market. Perhaps the best way to understand the relationship between volatility and market declines is to look at the options market form a put perspective.

A put is the option market equivalent of an insurance policy. An investor may purchase a put to insure a sale price for the underlying asset. The seller of a put may be viewed as the equivalent of an insurance underwriter. The put writer accepts a premium in return for accepting a risk, which in this case is ownership of the underlying asset. In the insurance business, premiums rise following significant negative events. In the options business, market volatility, the critical factor in determining put premium levels, increases in periods of market distress.

The same factor that leads to an increase in put premium levels, increased volatility, causes call option premiums to increase at the same time. Thus, put premium levels and call premium levels move together because they are both related to volatility. This relationship is critical to the option strategist. High call premiums during periods of market distress are the opposite of what most investors expect.

A similar pattern would be observed if we looked at a chart of the implied volatility of an individual stock. When looking at an implied volatility for a stock, remember that the number can vary from option to option within a family of options. It can also change for in-the-money or out-of-the money types.

For this reason, most data services use a filtering process, or weight more heavily the more liquid at-the-money contracts. The most important consideration is that the service remains consistent in applying its rules. Remember also that as a stock’s options become less liquid, the implied volatility becomes a volatile number. This would suggest that decisions based on implied volatility would be better for liquid issues than those less often traded. The bottom line is that the VIX is the central starting point when putting together option strategies.

Jeff Neal

Recently, TradeKing’s Brian Overby had a nice discussion on the option Greek delta. Delta is a very important concept for an option trader to master. With that said, lets highlight some of the more salient points about this key Greek variable.

Delta is a measure of the change in the price of your option relative to a change in the price of the underlying asset. Let’s say you have purchased a call option on an underlying stock because you are expecting the price of this stock to rise. There is a distinct relationship between what you paid for the option, the current premium being asked for the option, and the price of the underlying which you have an option.

The delta factor addresses questions like if the stock price increases by $1, will the premium of that option increase by $1? The delta factor is calculated by dividing the amount of price difference of your option by the amount of price difference in the underlying stock. For example, if the price of your stock option increased by .20 when the stock price went up .40, you would have a delta factor of .50 arrived at by dividing .20 by .40. This means you would expect your option to increase at half the rate of the stock.

A delta factor of .50 is common when an option is very close to being in-the-money. The delta should never exceed 1. Therefore, the higher the delta factor is, the higher potential there is for profits as the underlying stock price moves. The opposite is also true. The higher the delta factor, the more expensive the option and the higher the loss can be for buyers.

Practice following the deltas of the favorite stocks that you trade and use it as a planning tool to enter and exit your option positions. Always keep in mind that delta factors are not stable. They change whenever the price of the option premium and the underlying stock change, which is almost constantly during trading hours. But these prices usually move in tandem, except when the option approaches expiration causing its time value to decay rapidly.

Jeff Neal

Given the current economic climate, one would think the stock market should be down, but the opposite is true. The fact is, we are in a bull market. Last week was the one-year anniversary of the March 2009 bottom and, today, we have gains totaling 70% since last year. To capitalize on this market, one has to identify which sectors are most likely to do well in a certain phase of an economic rebound and an accompanying bull market phase.

In the early expansion phase of the bull market, technology, financials, transportations and consumer cyclicals led the charge. Stocks in these categories include, Union Pacific (UNP), FedEx (FDX), Kansas City Southern (KSU), Bank of America Corp. (BAC), Cisco Systems (CSCO), Landstar System Inc. (LSTR), Apple Inc. (AAPL) and Freeport McMoRan Copper & Gold Inc. (FCX). You should expect large growth stocks to excel in 2010. They will lead the pack whether the bull market continues or we hit another bear market. The U.S. economy still ails and recovery is expected to be slightly anemic. In such a tough economic environment, large companies with strong balance sheets, plenty of cash and solid growth in revenues and earnings should continue to lead the charge and remain top performers. Many are reaping an increasing percentage of their sales from emerging markets and these stocks are still cheap given their attributes.

If you are an aggressive investor, don’t neglect emerging markets stocks this year. Developing countries such as China are growing in leaps and bounds. Many have far healthier balance sheets that the U.S. iShares MSCI Emerging Markets Index (EEM) is one way to capitalize on this trend. The fund has skyrocketed since last year. It may come as a surprise, but retail, business services, newspaper and movie studio stocks performed quite well over the last 52 weeks, though advertising revenues are down for newspapers and magazines.

Some people may be skeptical about following bull/bear models, but they have been mostly right in identifying this latest bull market. In the second phase of the bull market, pay close attention to industrial stocks and basic materials stocks. This group includes Texas Industries (TXI), which sells cement; Transocean (RIG), a deep water driller and Joy Global (JOYG). Still, leave some room for exceptions.

Janet Shan

Beer is probably the recession’s lesser known golden child. Think about it: it’s a simple, relatively low-cost enjoyment doubling as a portfolio perk. TradeKing forum members agree (link). There’s little to dislike about beer stocks except, perhaps, deciding which company is the best bet. A tough decision, indeed. Perhaps this is one instance where personal taste is the deciding factor.

ANHEUSER-BUSCH INBEV (BUD)
Warmer weather calls for the annual spring lawn clean up and what better way to finish off these backbreaking chores than with a light ale from that traditional, centuries-old brewer, Anheuser-Busch InBev? Never mind that these two companies merged in 2008, it’s the tradition that counts here. Responsible for approximately 200 brands of beer, this company serves up such well-known brews as Budweiser, Stella Artois, Becks, Bud Light, Brahma, Michelob, Harbin and Sibirskaya Korona.

Weighing in with an $80 billion market cap, the company also offers:

• 17.51 P/E ratio;
• 2.90 EPS;
• 12.55% profit margin;
• 17.49% ROE;
• A stock target price estimate of $69.33.

DIAGEO (DEO)
For those preferring the comfortably dark, Irish-pub-and-darts environment to the lawn chair and sprinkler, Diageo is the company to check out. Listed on both the New York Stock Exchange(DEO) and the London Stock Exchange (DGE), Diageo owns Guinness stout, Smithwick’s Ale, and Harp, in addition to other various brands of whisky, scotch, rum, gin, tequila, and vodka.

Holding an almost $41 billion market cap, Diageo woos beer drinkers by offering:

• 18.44 P/E ratio;
• 3.62 EPS;
• 15.92% profit margin;
• 39.74% ROE;
• A stock target price estimate of $79.17.

FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. (FMX)
Little is better with sizzling fajitas than an ice-cold beer and this company eagerly provides its customers with such choices as Carta Blanca, Tecate, Tecate Light, Superior, Sol, Dos Equis Lager, Dos Equis Ambar, Indio, Bohemia, Noche Buena, Kaiser, and Bavaria.

The market apparently agrees as Fomento holds a surprising $170.29 billion market cap. However, future expectations could prove to be a little too spicy for some investors when cross-company ROE, profit margins, and EPS comparisons are made:

• 216.32 P/E ratio;
• 0.22 EPS;
• 5.03% profit margin;
• 10.73% ROE;
• A stock target price estimate of $53.50.

THE BOSTON BREWING COMPANY (SAM)
True-blue, publicly held American beer companies are hard to find these days but The Boston Brewing Company (SAM) is one of them. Best known for its numerous Sam Adams brews and “craft beer” image, this company has been busy winning more accolades in international beer-tasting competitions over the past five years than any other brewery in the world. Slow and steady seems to be the work motto, plus a zero balance for both short and long term debt holdings:

• 24.22 P/E ratio;
• 2.17 EPS;
• 7.50% profit margin;
• 19.87%;
• A stock target price estimate of $52.75.

As always, it’s best to thoroughly research any potential investment before buying. However, if choosing a particular beer stock seems too difficult, consider taking the simpler approach. If the company is doing well, buy both the stock and the beer. If the company is struggling but still makes a great beer, just buy the beer. The company will still enjoy the profit and you’ll enjoy the product.

Drink some, hold some. A win-win situation for everyone.

Gwynneth Anderson

Many traders avoid options because they find them complicated, especially when it comes to understanding the “Greeks”, or they look only at Delta, which is the percentage an option will rise or fall in relationship to a $1 movement in the underlying stock. Another important Greek related to options is Theta. TradeKing’s Brian Overby (link) gives an easy to understand explanation of Theta.

A major difference in trading options over stocks is the fact that they have a fixed time limit – options expire. Therefore, any trade decision utilizing options means that you should have a fairly good idea of how long or short an expected stock movement may take. Understanding how to read and interpret Theta may give you an edge in making decisions with respect to buying or selling options. For example, a higher theta would be beneficial when you are selling options because you want the value of the option to decrease faster over time. On the other hand, a slower rate of theta on an option purchase can give the trade time to work in the expected direction.

In this initial post on theta, Brian gets into some basic math. Using only this basic information, that “options move at the square root of time” you can very quickly get a picture of how quickly an option will decay or melt away its value. This information could help you to make a better choice of option instrument for trading. You may also want to review some of Brian’s other posts related to time decay. He has presented what is often considered to be complex material in an accessible way that a trader can apply immediately.

Most brokers provide the Greeks in the quotes for their option chains. The next time you are considering a trade using options such as a covered call, you will be able to quickly get an idea of how much value the option will lose as each day passes.

Shalini Gupta

For all you new option traders or individuals looking to get into options trading there is a terrific resource to get valuable education for free. The site is the Options Playbook powered by TradeKing, and it’s packed with valuable information about the options market.

After reviewing the site you can locate and educate yourself on a variety of option strategies. These include all the combination type option strategies like the bull call spread, bull put spread, bear put spread, bear call spread, butterflies, covered calls, ratio spreads as well as the more straight speculative positions like the straight call and the straight put.

In addition, the options playbook site goes into key options concepts like implied volatility and time value and how they can impact an options position. The bottom line is this is a super site for the novice trader to get their feet wet and acquire a quality free introduction into the exciting world of options trading.

Jeff Neal